SARS Must Provide Reasons For Its Decisions…But How Far Is It Required To Go?

SARS Must Provide Reasons For Its Decisions…But How Far Is It Required To Go?

Whenever SARS conducts an audit which results in revised or additional assessments being issued, adequate reasons must be provided for such assessments.But how detailed are such reasons required to be? In other words,how far is SARS expected to go?

In a recent case that came before the Supreme Court of Appeal (SCA) (Commissioner: SARS v Sprigg Investment 117 CC (36/10)[2010] ZASCA 172), the court was required to decide whether SARS had provided adequate reasons for additional assessments issued to the taxpayer in respect of income tax, VAT, and employees’ tax.

The facts of the case can be briefly summarised as follows:SARS conducted an audit of the taxpayer’s business in September 2004, in which a dispute was raised concerning the relationship that the taxpayer had with its distributors.

The following three areas of tax were impacted:• From an employees’ tax point of view, SARS contended that payments to the distributors constituted "remuneration” as defined in the Fourth Schedule to the Income Tax Act, from which Paragraph 2 requires that employees’ tax be deducted.• As far as income tax was concerned, SARS further contended that the consideration paid to the distributors constituted "gross income”, as defined in Section 1 of the Income Tax Act, in the hands of the taxpayer.• Finally, since the taxpayer is a registered VAT vendor, such amounts that SARS alleges forms part of the taxpayer’s gross income represent taxable supplies, and thus the taxpayer is required to account for output VAT at the standard rate (14%)on such supplies.

After a great deal of exchange between SARS and the taxpayer,including requests for information by SARS’ auditors, SARS communicated its findings to the taxpayer by issuing a "Letter of Findings” on 14 December 2006.

The taxpayer responded to SARS on 2 February 2007 disputing the conclusions to which the SARS auditors had arrived.However,SARS was not swayed by the taxpayer’s arguments, and issued a"Letter of Assessment” on 14 June2007, followed by formal assessments dated 15 June 2007and 16 July 2007 in respect of the various taxes.

The taxpayer did not accept these additional assessments, and responded by requesting SARS to provide reasons for the assessments.However, such request took the form of two letters dated 25 and 26 July 2007 which contained 97 detailed questions relating to the various areas for which additional assessments had been raised.SARS declined to reply to each individual question,instead providing a brief explanation concerning each additional assessment and referring to its original "Letter of Findings”which provided reasons for such assessments.

The red mist descended at this point, with the taxpayer launching an application to the Tax Court compelling such court to issue an order against SARS to furnish"adequate reasons” for the additional assessments.The Tax Court found in favour of the taxpayer, ordering SARS "to give adequate reasons for the assessments that were structured‘so as to motivate his [the Commissioner ’s] assessment clearly and set out the findings of fact on which his conclusions depend; the relevant law upon which his conclusions are based;and the reasoning process which led to those conclusions’.”

When SARS appealed the judgement of the Tax Court, the taxpayer, quoting the Federal Court of Australia in Ansett Transport Industries (Operations) Pty Ltd and Another v Wraith and Others(1983) 48 ALR 500 at 507,contended that the "reasons” to be provided by SARS must meet the following standards: "[T]he decision-maker [must] explain his(sic) decision in a way which will enable a person aggrieved to say, in effect: ‘Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.’ This requires that the decision-maker should set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute),and the reasoning processes which led him to those conclusions.He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation.The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement.Often those factors may suggest a brief statement of one or two pages only.”

The SCA judge stated that while he agreed with the sentiments conveyed in the Ansett case, he believed that the taxpayer was requiring more of SARS than would be considered reasonable under the circumstances.He went on to say that "the test envisages that the decision in issue may involve ‘an unwarranted finding of fact, or an error of law, which is worth challenging’ and merely requires the decision-maker to explain why he decided the way he did to enable the requester of reasons to launch his challenge”,and that "[t]he question now is simply whether the respondent [the taxpayer] has sufficiently been furnished with the commissioner’s actual reasons for the assessments to enable it to formulate its objection thereto.”

During argument, counsel for the taxpayer conceded that the letter containing the 97 questions was "the product of ‘an attorney being over-enthusiastic’ ” and that the sort of detailed response requested from SARS was"unwarranted”.The SCA agreed,stating that not only had SARS provided reasons for the additional assessments in its "Letter of Findings”, but the taxpayer had not in any way objected to the quality of SARS’ findings and also did not indicate a lack of understanding of such findings.In fact, the taxpayer’s detailed response to SARS indicated that it had no difficulty in formulating its objection to SARS’ findings and reasoning behind such findings.So the question that must be asked is: Was the taxpayer reasonable in its request to SARS,or was it (at best) being overly pedantic or (at worst) employing delaying tactics?

The SCA certainly thought that the taxpayer was pushing things too far.According to the judgement, "[t]he letter of assessment, which the [taxpayer] was urged to read in conjunction with the letter of findings, stated in plain terms that the [taxpayer] was being assessed for income tax, employees’ tax and VAT.It explained the reasons for the imposition of employees’ tax,VAT and the ancillary penalties and interest.It explained further why no revised assessments would be issued in respect of income tax.

The evidential basis for SARS’ main factual findings, those findings and the legal consequences that flowed from them were clearly set out—that because the distributors were the respondent’s employees they therefore sold the device on its behalf and that those sales formed part of the respondent’s gross for which it should have accounted for out put tax.There is absolutely no reason why the [taxpayer] would be unable to formulate its objection, if it has any, in the circumstances”.

The SCA thus concluded that the reasons supplied by SARS in the "Letter of Findings” and response to the taxpayer’s letter were adequate for the purpose for which they were sought, and found in favour of SARS.The moral of the story? Object to an assessment by all means, but if your aim is simply to get SARS bogged down in all matters of red tape and pedantic questioning in the hope that SARS will simply throw in the towel and go away, this case proves that SARS is not only made of sterner stuff than that, but also, if shown to be reasonable in its actions, SARS will ultimately prevail.

Under such circumstances, don’t expect too much mercy from any penalties that SARS may impose.

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